When a company goes into liquidation, debtors are often faced with statutory demands and claims from the liquidator. These demands are not designed to be ordinary debt collection tools. Rather, under the Companies Act 1993 (the Act), their purpose is to establish whether a company is insolvent. With this in mind, statutory demands are appropriate where there is no genuine and substantial dispute over the existence of the debt.
Under section 290(4)(a) of the Act, a debtor can apply to set aside a statutory demand where there is a genuine dispute over the claimed debt. However, whether a dispute is “genuine” and “substantial” is not judged solely on assertion. Courts expect parties disputing a debt to produce supporting evidence.
Why do supporting documents matter?
The case law on section 290(4) makes it clear –
- The onus is on the applicant (the party disputing the debt) to demonstrate there is an arguable, substantial dispute.
- A mere denial is not enough. Material evidence, such as correspondence, invoices, contracts, or contemporaneous objections, must be put forward.
- The Courts will not resolve the dispute during an application to set aside a statutory demand but will assess whether the evidence shows a genuine issue to be tried.
If a party fails to provide supporting documents when disputing a debt, they run the risk of the liquidator’s statutory demand being upheld. At that point, the debt may be deemed undisputed, and the company may face serious consequences, including potential liquidation proceedings.
The courts have also emphasised that the timing of a dispute is a crucial factor.[1] If disputes are raised contemporaneously with the invoices or demand for payment, they are far more likely to be accepted as genuine.
For this reason, entities dealing with a liquidator must be proactive. If you dispute a debt, you should respond promptly when a demand is first made and provide supporting documents to show the debt is not owing or disputed as soon as possible.
Timing is everything
For parties dealing with a company in liquidation, the key takeaway is simple: if you dispute a debt, act quickly and provide supporting documents at the earliest stage. Do not wait until a statutory demand is issued. Courts give far more weight to disputes raised contemporaneously with the original demand than to those raised later. By taking early action and producing evidence, you protect your position, avoid unnecessary litigation, and reduce the risk of being wrongly pursued for a debt you do not owe.
[1] Immigration Advice New Zealand Ltd v Sales Navigator [2023] NZHC 3394.
